‘Tying reforms, incentives helped widen adoption’

India has moved from a model of ‘reforms by stealth and compulsion’ to a new model of ‘reforms by conviction and incentives’, Prime Minister Narendra Modi said on Tuesday, referring to States being granted additional borrowing limits last year under a reform-linked window.

Raising enough resources for public welfare while ensuring sustainability is proving to be one of the biggest challenges for governments during the pandemic, the PM pointed out, but Indian States were able to borrow an extra ₹1.06 lakh crore in 2020-21 (FY21).

“For a large nation with complex challenges as ours, this was a unique experience. We have often seen that for various reasons, schemes and reforms remain unoperational, often for years,” he said in a post on the job search and social networking portal LinkedIn.

“Officials who have been working on these reforms suggest that without this incentive of additional funds, enactment of these policies would have taken years. This was a pleasant departure from the past where the Centre & States came together to roll out public-friendly reforms in a short span of time amidst the pandemic,” Mr. Modi wrote.

In May 2020, under the Aatmanirbhar Bharat package, the Centre had permitted States governments to borrow an additional 2% of Gross State Domestic Product (GSDP), but half of it was contingent on implementation of four specified reforms. Twenty three States availed of additional borrowings of ₹1.06 lakh crore out of a potential ₹2.14 lakh crore.

“Each of the reforms was linked to improving the Ease of Living to the public and particularly the poor, the vulnerable, and the middle class. Secondly, they also promoted fiscal sustainability,” Mr. Modi wrote.

Seventeen States that facilitated ration-card portability and installed electronic point-of-sale devices at fair price shops were granted additional borrowings amounting to ₹37,600 crore, the PM noted. Similarly, 20 States completed reforms to ease the red tape faced by businesses to avail borrowings of ₹39,521 crore.

“The third reform required States to notify floor rates of property tax and of water & sewerage charges, in consonance with stamp duty guideline values for property transactions and current costs respectively, in urban areas. 11 states completed these reforms and were granted additional borrowing of ₹15,957 crore,” he added, stressing that the urban poor would benefit the most from this step.

The least traction was seen for the Union government’s reform idea of replacing free electricity for farmers with a Direct Benefit Transfer. States were asked to frame a scheme with actual implementation in one district on a pilot basis by the end of 2021, for an additional borrowing limit of 0.15% of GSDP. Loans worth another 0.10% of GSDP were linked to reducing the gap between revenues and costs and reducing technical and commercial losses in the power sector.

“13 States implemented at least one component, while 6 States implemented the DBT component. As a result, ₹13,201 crore of additional borrowings was permitted,” the PM said in his post.

“This nudge for reform is rare in Indian public finance. This was a nudge, incentivising the States to adopt progressive policies to avail additional funds. The results of this exercise are not only encouraging but also run contrary to the notion that there are limited takers for sound economic policies,” the PM emphasised.

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